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27 April, 13:06

Indigo Company reports the following financial information before adjustments.

Dr. Cr.

Accounts Receivable $132,500

Allowance for Doubtful Accounts $3,970

Sales Revenue (all on credit) 838,100

Sales Returns and Allowances 50,780

Prepare the journal entry to record bad debt expense assuming Carla Company estimates bad debts at (a) 4% of accounts receivable and (b) 4% of accounts receivable but Allowance for Doubtful Accounts had a $1,570 debit balance.

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  1. 27 April, 13:12
    0
    DR. CR.

    (a)

    Bad Debt Expense $1,330

    Allowance for Doubtful Accounts $1,330

    (b)

    Bad Debt Expense $6,870

    Allowance for Doubtful Accounts $$6,870

    Explanation:

    Explanation:

    a)

    Allowance for Doubtful Accounts for the year = Closing Account receivable x Rate of Allowance = $132,500 x 4% = $5,300

    Allowance for Doubtful Accounts already has credit balance of $3,970 so the net value of $1,330 ($5300 - $3,970) is adjusted in the journal entry.

    b)

    As the Allowance for Doubtful Accounts already had debit balance of $1,570but we have to make it as $5,300 credit balance because this is the contra asset account which normally has credit balance.

    Adjustment amount = $5,300 + $1,570 = $6,870
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